Paying tax under self assessment by arnold1


									Paying tax under self assessment

Under self assessment, you usually pay income tax in three instalments. The first two
are payments on account of tax due for the current tax year. These are based on the
previous year. Each payment is half the tax (and Class 4 National Insurance if you are
self employed) due for the previous year, less tax paid by deduction at source. You then
pay the balance of tax due to make up the right total for the year by 31 January
following the tax year end. If you have paid too much tax ‘on account’, you will get a

So if the tax (and National Insurance) due on your profits for the year to 5 April 2007
was £3000, you will make payments on account in respect of your profits for the year to
5 April 2008 of £1500 by January 31 2008 and £1500 by 31 July 2008. Your tax return
for the year 2008 gives the information to allow the correct tax to be worked out. If the
tax due is more than the amount you have paid on account, you will have to pay the
balance by 31 January 2009. If your income is lower than the previous year, you may
have paid too much on account, and be due a refund of tax.

You will usually have to make payments on account if you are self-employed, or have
substantial rental income or investment income on which higher rate tax is due.

If 80% of the tax for the year (apart from capital gains tax) has been collected by
deduction (on employment income or pension, from bank or building society interest,
dividends etc), you will not need to make payments of tax on account for the next year.
There is also no need to make payments on account if the total tax and National
Insurance contributions due under self assessment for the last year were not more than

You can apply to reduce your payments on account if you know that your income has
gone down from the year before. You can do this on form SA 303. For example you
may have received a large payment on which further tax is due, such as a redundancy
payment liable for higher rate tax. This may trigger a demand for payments on account
for the following year. You should apply to reduce the payments to zero if you know this
was a ‘one-off’.

You need to be careful about reducing payments on account. If you get them reduced, and
then your income increases so that the tax for the year is as much or more than the original
payments on account, you will have to pay interest on the difference from the date the
payment on account was due.

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